Question

Jay-Z and Beyonce are stranded on a desert island. Each has rum (R) and bread (B). Beyonce only eats bread and rum in fixed proportions: 2 cups of rum with one slice of bread. Her utility is given by: UB = min(B,R/2). Jay-Z, on the other hand, is more flexible and has the following utility function: UJ = 4B+3R. Total endowments are 100 slices of Bread and 200 cups of Rum.

(a) What is the only price exchange ratio that can arise in equilibrium?

(b) Suppose Beyonce initially has 40B and 80R. Draw the Edgeworth box that represents this exchange economy (with Beyonce on the lower vertex), including the initial endowment point and some indifference curves for each.

(c) What would the equilibrium allocation point, given this initial endowment?

(d) Suppose Beyonce initially had 60B and 80R. Draw the Edgeworth box that represents this exchange economy (with Beyonce on the lower vertex), including the initial endowment point and some indifference curves for each.

(e) What would the equilibrium allocation point, given this initial endowment?

Answer 1